Tiered health plans touted for adding competition, leveling costs

Manitowoc County sees success with system forcing hospitals to compete on price, quality

By Guy Boulton of the Journal Sentinel

Manitowoc County will spend roughly the same amount to provide health benefits this year as it spent six years ago. In that time, the average cost of family coverage nationally has increased more than 30%.

The county has kept costs in check largely by giving its employees and their family members financial incentives to become better consumers of health care. This year, it took those initiatives a step further.

Manitowoc County is among a small group of employers that have moved to a new health plan that gives people an incentive to go to hospitals that provide overall quality care at the lowest cost.

Employees still can go to the hospital of their choice without getting hit with the high bills people face when they go to a hospital not in their health plan's network. But they will have higher co-pays - $850 for inpatient care and $500 for outpatient care.

The goal is to make employees more conscious of how prices for the same procedure can vary by thou sands of dollars at different hospitals.

"It's shining a light on it in a way that we've never been able to do before," said Sharon Cornils, the county's personnel director.

The new plan - what is known as a tiered health plan - is designed to take on one of the perennial challenges in health policy: How to make the health care market work a bit more like other markets by rewarding hospitals and doctors that provide comparable or better care at a lower cost.

Tiered plans determine which hospitals and doctors provide the best value and then give people a financial incentive to use them.

"For the first time, providers will be forced to compete on cost and quality," said Joseph Holt, vice president of sales and marketing for Auxiant Inc., which introduced the new plan.

Auxiant manages health plans for employers that self-insure, or pay most of the medical bills of employees and their family members themselves.

Tiered health plans have yet to take hold in Wisconsin, in part because some health systems, including Aurora Health Care, have had clauses in their contracts that require their hospitals to be in the top tier of any tiered plan.

But UnitedHealthcare expects to introduce a tiered plan in Wisconsin next year. The plans also are becoming more common throughout the country, particularly in Massachusetts and Minnesota. Legislation passed in Massachusetts in 2010, for instance, requires health plans that cover more than 5,000 people to offer either a tiered or limited network.

Creating competition

Tiered health plans put some limits on people's choice of doctors and hospitals in exchange for lower premiums, a trade-off that doesn't appeal to everyone.

They also put in place a framework for true competition, said Dave Osterndorf, chief health care actuary for Towers Watson, a benefits consulting company.

That doesn't exist now.

Most health plans include every health system in a given area. And even though many health insurers, including UnitedHealthcare, Humana and Anthem Blue Cross and Blue Shield in Wisconsin, provide information on the cost of a test or procedure at different hospitals, few people make use of the information.

One reason for that is, once someone reaches the deductible, he or she has little incentive to care about the cost. If a procedure costs several thousand dollars more at one hospital than another, the health insurance company or employer bears the additional cost.

As a result, the market rarely rewards the most efficient hospitals or health systems.

"There is zero economic incentive today for providers to compete on price or even quality," said Brian Beck, Auxiant's director of operations, who created the new plan with Holt.

The Madison market, where integrated systems with their own health plans compete against one another, is somewhat of an exception. But generally, price competition among health systems is limited. Instead, health systems compete by offering more services, locations and amenities.

"The patient experience has been where I've competed, not the value I provide," Osterndorf said.

Costs vary by hospital

Tiers are common in prescription drug plans, which often tie co-pays to a drug's cost. If someone wants a branded drug when a less expensive generic is available, he or she has a higher co-pay.

The drug plans have proved that people respond to incentives.

Auxiant's tiered plan, which it has introduced in Iowa and Wisconsin, includes only hospitals and is no more than a first step, Holt said.

The plan gives people the option of getting care at a hospital not in the top tier without paying a higher co-pay if the hospital's costs and quality for a specific category of care, such as cardiac or orthopedic, is comparable to those in the top tier.

This is because hospital prices and quality can vary significantly depending on the procedure.

"There are huge swings when you are looking at specific procedures," Beck said.

Columbia St. Mary's Hospital in Milwaukee, for example, is not in the top tier in Auxiant's plan. But based on Auxiant's methodology, the hospital excels at spinal surgery, with a solid quality score and lower costs.

Auxiant estimates that spinal surgery costs $16,644 at the hospital compared with a statewide average of $21,688. The difference is even wider for patients with major complications: $38,885 vs. $65,037.

That's just one example of how costs can vary among hospitals.

Auxiant worked with a consultant to develop the methodology for rating hospitals on their quality and cost, and health systems are likely to question the methodology.

Good information on the quality of outpatient care isn't available. The ratings don't include physician fees. And they are based only on estimated hospital costs - not the entire cost of an episode of care.

Beck acknowledges that the total cost of an episode of care is what matters.

"There's no question that that's the direction we've plotted for ourselves," he said. "But who knows how long it will take to get there."

The methodology is not perfect, Beck said, but it is a start.

"We are not going to sit on the sidelines and say, 'It's not perfect, so we are not going to do it,' " he said.

Auxiant will be refining the plan in the coming years.

Methodology challenged

Even with the inherent limitations, the new health plan holds the promise of lower costs for employers given how hospital prices can vary.

Hospital care accounts for about half of the cost of providing health benefits for employees. At the same time, a small percentage of employees account for most of an employer's costs.

This means that steering a small group of patients to a hospital with lower costs and comparable quality can generate sizable savings.

Auxiant estimated that one prospective client would have saved $121,000 if just seven surgeries had been done at a competing hospital with lower costs.

Those kind of savings appealed to Manitowoc County.

The City of Manitowoc also has moved to Auxiant's tiered plan for most of its employees, said Steve Corbeille, the city's finance director and treasurer. But it is requiring a larger co-pay of $1,000 only for inpatient care when someone uses a hospital not in the top tier.

The county's and city's decisions have generated some controversy.

Auxiant's plan has Aurora Medical Center in Two Rivers in the top tier and Holy Family Memorial Hospital in Manitowoc in the second tier.

The two hospitals are less than five miles apart.

Holy Family Memorial initially told county employees that it would reimburse their higher co-pays but subsequently backed off on the offer.

Mark Herzog, the chief executive of Holy Family Memorial, questioned Auxiant's methodology, noting that gauging quality and costs accurately is difficult and that methodologies vary.

The ratings also can be based on dated information, he said. Good quality measures for most outpatient procedures don't exist. And Holy Family Memorial's costs can be higher because it offers more services.

Employers cautious

In Massachusetts, tiered plans have evoked similar concerns. Doctors and hospitals, for example, can find themselves placed in different tiers for different health plans.

There also is no evidence yet that they are affecting prices, said Anna Sinaiko, a research fellow at the Harvard School of Public Health who has done research on tiered plans.

"We still don't know if this is going to make a big difference," she said.

For now, employers in Wisconsin are moving cautiously.

Valley Bakers, a distribution cooperative with 141 employees in Greenville in Outagamie County, is using Auxiant's tiered plan to give people needed information on cost and quality when they are deciding where to get care.

"People want to know how to make those decisions, and, hell, you can't figure it out," said Mark Munroe, president and chief executive.

But Valley Bakers is not requiring people to pay higher co-pays for hospitals not in the top tier.

Seats Inc. in Reedsburg plans to offer the new plan next year. But it, too, is holding off on requiring higher co-pays.

"That may come down the road," said Jerry Ward, vice president of operations for the company, which makes operator seats for companies such as Oshkosh Corp. and Deere & Co.

The company, which employs about 500 people, sees the tiered plan as a tool to help employees recognize the differences among hospitals.

But Ward envisions tiered health plans eventually leading to more competition, with hospitals and doctors working to get into the top tier - and those already in that tier working to maintain their competitive advantage.

That's how other markets work. And that is the idea underlying tiered plans.

"In the other worlds I work in," Ward said, "continuous improvement is a reality."